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Oil sands production could carry risk for investors

The oil spill in the Gulf of Mexico has already had devastating environmental consequences, but let's leave that aside for a moment and ask -- how should oil company investors be thinking about risky production projects?

by Kim Murphy —
Los Angeles Times BlogPosted on May 17, 2010

The oil spill in the Gulf of Mexico has already had devastating environmental consequences, but let's leave that aside for a moment and ask -- how should oil company investors be thinking about risky production projects?

That's the tack some financial analysts are taking with the massive, controversial and carbon-intensive projects that aim to extract heavy oil trapped in the sands and clay of central Alberta in Canada.

It's often described as the biggest energy project in the world, and according to a new economics report, it could be among the riskiest for those who have already invested $200 billion in capital to bring the new energy to market.

The report, authored by the RiskMetrics Group on commission from Ceres, a coalition of investors, environmental and public interest groups, warns that the likelihood of new low-carbon fuel standards, fresh-water scarcity and contaminated tailings ponds could make oil sands investments a tricky prospect for money managers.

"The BP oil spill has raised awareness...of the environmental risks of exploring in high-risk frontiers, and the very real risk of getting it wrong," Andrew Logan, director of Ceres' oil and gas program, said in a conference call with reporters.

"Investors want companies to consider the fact that carbon will be regulated, that water will be increasingly scarce, that tailings ponds will need to be cleaned up, and that the solutions to these problems will be quite expensive," Logan said.

Joining in the call was Jack Ehnes, chief executive of the California State Teachers' Retirement System, the second-largest public pension fund in the U.S., with about $1.9 billion invested in major oil companies that are or could become active in Canadian oil sands development.

"We have quite a bit of our teachers' money at stake here, and considering these companies' exposure to oil sands, we need to make sure...they are properly managing their risk," Ehnes said.

Oil sands producers say bitumen production is one of the most promising avenues for reducing North America's reliance on Middle East oil. They hope to nearly triple current output by 2025 and produce more than 4 million barrels of synthetic crude oil a day, more than double the current oil production in the Gulf of Mexico.

Most is currently exported to the United Sates. Critics say extracting bitumen from sands and clay requires three times more energy than producing traditionally drilled oil, consumes four barrels of fresh water for every barrel produced and requires large amounts of relatively clean natural gas.

Demands for water withdrawals from the Athabasca River, where a continuous supply of water is also needed for fish habitat, could exceed wintertime allowances by as early as 2014, the report concludes.

Producers say they are working successfully to reduce the amount of water needed to extract the heavy oil and also to shrink the footprint and duration of tailings ponds -- admittedly expensive endeavors.

The report concludes that global oil prices will need to remain at least $65 a barrel, and possibly above $95 a barrel, to pay for the proposed expansion in oil sands production.

Jim Coburn directs Ceres’ efforts to improve mandatory climate and sustainability risk disclosure by corporations. Drawing from his legal background, Jim helps to develop rules and guidance on reporting that strengthen corporate risk management practices and improve investor decisions. He most recently played an integral role in leading the initiative that resulted in the SEC’s issuance of groundbreaking climate disclosure guidance for corporations in 2010.